Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
This appeal filed by the assessee is directed against the order of the CIT(A)-II,
Kochi dated 05/06/2018 and pertains to the assessment year 2011-12.
The assessee has raised the following grounds of appeal:
The Appellant and its holding company M/s Vertex Securities Limited are having common directors and is sharing common infrastructure, including office, telephone, internet etc. The Managing Committee of the both the companies (comprising of directors and other top management officers) decided to apportion a part of the common expenses to the Appellant and an inter-office note was issued based on that. Copy of the Inter Office Note is attached as Annexure 1.
I.T.A. No.438/Coch/2018
1.1. The Appellant was formed as a separate company only because of statutory compulsion. As per the SEBI regulations, a company who is into equity broking cannot do Commodity broking. Hence the appellant was formed as subsidiary of Vertex Securities Limited (which is into equity broking)
1.2. The Appellant has brought in specialised managerial persons to the commodity business as the new market needed to be penetrated. They were dedicated professionals specialised in this segment.
1.3. A considerable amount of study and a fair analysis of expenses were made and sharing was fixed based on the consideration of all aspects.
1.4. The Appellant has claimed the managerial remuneration of those persons who are entrusted with the business of the Appellant exclusively. Similarly, Connectivity Charges, Rent, Telephone, Electricity and Travelling are also allocated based on the proportionate usage of such facilities/infrastructure.
1.5. The allocation of expenditure is based on a fair estimate of such usage arrived by the management depending on the factual situations.
The Appellant continued this practice of sharing of expenses till such time, the Appellant was able to do its business on its own, without the support of the holding Company. Accordingly, the Appellant had debited shares expenses in future also as below:
Assessment Year Amount of Shared Remarks Expenses
2012-13 89,62,755.00 Assessment completed u/s 143(3)
2013-14 86,50,520.00 Assessment completed u/s 143(3)
2014-15 48,99,790.00 Assessment completed u/s 143(3)
It may be noted that the sharing of expenses for all subsequent years was accepted by the department and completed the assessment without any addition on this account during the scrutiny.
I.T.A. No.438/Coch/2018 2.1. From the above, it may be noted that the Appellant is consistently following this accounting policy which is accepted by the Department also.
On the basis of the above grounds, it is humbly prayed that the addition of Rs. 19,00,800/- on account of shared expenses be deleted.
The facts of the case are that in the Profit and Loss Account, the assessee had
claimed an expenditure of Rs.95,04,000/- under the head 'Expenses on Shared
Services'. The assessee stated that it had reimbursed some common expenses
incurred by its Holding Company of the assessee, M/s. Vertex Securities Ltd. which
was into broking services. The common expenditure met by the holding company
included (i) Managerial Remuneration, (ii) Communication Expenses, (iii) Travelling
& Conveyance Expenses, (iv) Connectivity Charges and (v) Rent. The assessee had
reimbursed 50% of all these expenses to the holding company. The profit and loss
account of the holding company, M/s. Vertex Securities Ltd. and the assessee
company are summarized below:
Description Holding Company , Assessee
Company
Brokerage Income 6,84,05,554 2,09,96.506
Other direct income 24, 31,676 0
Other income (excluding 1,22,96,931 27,06,354 income Shared)
Total Receipts 8,47,40,558 2,37,02,860
Total Expenditure 9,35,85,783 1,92,79,478 (excluding Expenses shared)
I.T.A. No.438/Coch/2018 Net income (before -88,45,225 44,23,382 including expenses shared)
Expenses shared -95,04,000 -95.04,000
Net income (after including 6,58,775 -50,80,618 expenses shared)
3.1 From the above, the Assessing Officer noticed that the holding company was
doing more than three times the business of the subsidiary company(assessee). The
expenditure which was shared @ 50% was Rs.95,04,000/-. According to the
Assessing Officer, the total turnover of both the companies taken together was Rs.
9,34,40,133/- (excluding other income) which meant that the assessee’s percentage
of turn over to the total turnover of both the assessees taken together was 22.47%.
Therefore, the Assessing Officer was of the view that the percentage of expenditure
that can be attributed to the assesses from the common expenditure cannot be
more than the percentage of turnover of the assessee. The total shared expenditure
of both the assessees taken together was Rs. l,90,08,000/- ( Rs.95.04,000 x 2). The
Assessing Officer rejected the explanation of the assessee that this being the initial
years of the formation of the company, the holding company had to give more
managerial attention to the company to get business on the reason that all the
above mentioned expenses had been shared equally whereas the share of business
of the assessee company was less than 23%. Considering all the circumstances, the
Assessing Officer allowed the shared expenditure @ 30% of the total expenditure of
I.T.A. No.438/Coch/2018 Rs. 1,90,08,000/- which comes to Rs.57,02,400/- Thus, the Assessing Officer made
the disallowance on this account at Rs.38,01,600/-( Rs. 95,08,000 -Rs. 57,02,400).
Against this, the assessee went in appeal before the CIT(A). The CIT(A)
observed that the size of the assessee and its holding company are not same and
the turnover of the holding company was approximately three times higher than the
assessee company. The CIT(A) observed that neither during the course of
assessment nor during the course of appellate proceedings, the assessee had
explained the method on which these expenses were apportioned. The CIT(A)
found that 30% of the rent was apportioned to the assessee and all other expenses
like service charge, connectivity charges, Telephone & Electricity had been
apportioned at 50% each. From the payment of rent, the CIT(A) found that the
holding company was occupying at least 3 times the space occupied by the
assessee. In view of this fact, the CIT(A) opined that sharing of electricity and
telephone cannot be at the rate of 50% each. The CIT(A) rejected the assessee’ss
contention that no such disallowance was made in subsequent years as every year
is a different year. However, taking into consideration the judicial pronouncements
relied upon by the assessee, the CIT(A) was of the opinion that, if 40% of the
expenses were apportioned to the assessee, it shall meet the ends of justice. The
CIT(A) observed that the assessee's reliance on the decision of the Delhi High Court
in the case of CIT vs. EHTP India Pvt. Ltd. (350 ITR 41) (Delhi) was misplaced, as in
the instant case, there was no method of apportionment, there is no basis, it is
simply 50 – 50 and the size of two concerns was different and the turnover was also
I.T.A. No.438/Coch/2018 different. According to the CIT(A), an arbitrary method, which is capable of
distorting the profits cannot be said to be a method of accounting which would lead
to substantial variation in the income. Thus, in view of above discussion, the CIT(A)
allowed 40% of the expenses claimed in place of 30% allowed by the Assessing
Officer and directed the AO to recalculate the disallowance.
Against this, the assessee is in appeal before us.
We have heard the rival submissions and perused the record. In this case, the
assessee had apportioned common expenses at 50% in respect of service charges,
connectivity charges, telephone & electricity. However, the Assessing Officer
apportioned the expenses only at 30% of the share of the assessee. The CIT(A)
considered it at 40% of the share of the assessee. The allocation of expenses was
made by the assessee on estimate basis. The apportion of the expenses at 50%
was consistently made by the assessee on continuous basis in subsequent years,
i.e., A.Ys 2012-13 to 2014-15. This was not disturbed by the Assessing Officer in
the subsequent years. In the assessment year under consideration, the Assessing
Officer disturbed the allocation of shared expenses, however, there was no re-
allocation of such shared expenses in the hands of the holding company, M/s.
Vertex Securities Limited. The Assessing Officer disturbed the allocation of shared
expenses only in the hands of the assessee which, in our opinion, would amount to
double taxation. In other words, if the Assessing Officer wants to reduce the
allocation of the shared expenses in the hands of the assessee, consequently, the
I.T.A. No.438/Coch/2018 balance amount of the shared expenses is to be allowed in the hands of the holding
company, M/s. Vertex Securities Limited which was not done by the Assessing
Officer which is inappropriate. In our opinion, the allocation of expenses was made
by the assessee on fair and reasonable basis and there is no basis for re-allocation
by the Assessing Officer. Hence, we are not in a position to agree with the order
of the CIT(A). Accordingly, we allow this ground of appeal taken by the assessee
and allow the shared expenditure as claimed by the assessee.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on this 7th March, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 7th March, 2019 GJ Copy to: 1. M/s. Vertex Commodities & Finpro (P) Ltd. , Thottathil Towers, IInd floor, Market Road, Ernakulam, Kochi-682 018. 2. Income Tax Officer, Ward-4(1), Kochi. 3. The Commissioner of Income-tax(Appeals)-II, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin
I.T.A. No.438/Coch/2018